THE INDIAN SUPREME COURT’S JUDGMENT ON CRYPTOCURRENCY – MUCH ADO ABOUT NOTHING
Since 2013, India’s central bank, the Reserve Bank of India (the “RBI”), followed a cautionary approach as regards virtual currencies, including cryptocurrencies. While it never banned virtual currencies, it issued a number of public notices and reports highlighting the risks of dealing and trading in virtual currencies.
According to RBI data, five million (5,000,000) Indian users engaged in virtual currency trades of INR1,000,000,000 (approx. US$13,441,492) daily up until April 6, 2018, when the RBI issued a circular (the “Circular”) prohibiting all entities regulated by the RBI (such as banks and non-banking financial institutions) from providing services to any persons dealing with or settling virtual currencies. The Circular was challenged by several cryptocurrency exchanges and other stakeholders in the cryptocurrency ecosystem, as it cut off their access to normal banking channels and adversely affected business. On March 5, 2020, India’s Supreme Court (the “SC”) set aside the Circular.
This update discusses the SC’s ruling and the future of cryptocurrencies in India.
The SC’s decision
The broad issues discussed in the SC’s judgment pertain to the status of virtual currencies in India, the RBI’s powers to regulate virtual currencies, and the effect of the Circular on virtual currencies.
The SC discussed at length the treatment of virtual currencies by various countries and international agencies, and acknowledged that virtual currencies are akin to traditional currencies although they do not have the status of a legal tender. But they cannot be treated as goods or commodities. However, the SC did not opine on whether cryptocurrencies in India should be regulated or banned, or be given the status of a legal tender. In addition, the SC upheld the RBI’s power to: (i) regulate and even prohibit the use of virtual currencies; and (ii) adopt any policies or issue directions in respect of virtual currencies, if it is of the opinion that something is likely to impact the payment system, the monetary policy, or the credit policy of India.
The SC observed that the Circular did not ban the use of virtual currencies but only stopped fiat money from being converted to virtual currencies and vice versa, which affected the business in virtual currencies through cryptocurrency exchanges. However, peer-to-peer transactions were not impacted. Eventually, after some back and forth, the SC ruled that despite the RBI’s power to adopt policy measures, the RBI acted unreasonably and could not substantiate its position by providing evidence of any legal contraventions made by cryptocurrency exchanges or any damage suffered by any of the entities regulated by the RBI on account of interfacing with cryptocurrency exchanges.
Essentially, the SC took the view that the RBI’s stand in issuing the Circular was disproportionate to the threat contemplated by the RBI, and therefore, set aside the Circular.
In our view, the SC’s ruling will bring temporary respite to cryptocurrency exchanges, which may restart their businesses, and this may result in an increase in the price of cryptocurrencies in the Indian market. However, it is pertinent to highlight that, in 2019, the Indian government had circulated a draft bill, namely, the Banning of Cryptocurrency and Regulation of Official Digital Currency Act, 2019. This bill seeks to: (i) ban the use and trade of cryptocurrencies in India; and (ii) create an official digital Indian Rupee as a legal tender. Interestingly, a previous version of this bill (which lapsed) aimed to regulate cryptocurrencies instead of outright banning them. It is likely that this or a similar bill will be passed, and it remains to be seen whether all forms of cryptocurrencies will be banned by the Indian government.
In addition, the SC has conclusively upheld that the RBI has the power to regulate cryptocurrencies, and this may lead the RBI to frame regulations on cryptocurrencies in the future. The RBI may amend the existing foreign exchange regulations to curb remittances for purchase of virtual currencies under the liberalized remittance scheme, which permits an Indian resident to remit US$250,000 per financial year for purchase on securities or assets.
Clearly, the last word has not been written on this subject.